3. Mr. Adama Fatty is considering investing some money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of three investment alternatives Adama is considering: 2 State of Nature Decision Alternative Good Economy Poor Economy Stock Market 80,000 -20,000 Bonds 30,000 20,000 CDs 23,000 23,000 Probability 0.5 0.5 a) What decision would maximize expected profits? b) What is the maximum amount that should be paid for a perfect forecast of the economy? c) Develop an opportunity loss table for the investment problem, what decision would minimize the expected opportunity loss? What is the minimum EOL?
3. Mr. Adama Fatty is considering investing some money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of three investment alternatives Adama is considering:
2
State of Nature
Decision Alternative Good Economy Poor Economy
Stock Market 80,000 -20,000
Bonds 30,000 20,000
CDs 23,000 23,000
Probability 0.5 0.5
a) What decision would maximize expected profits?
b) What is the maximum amount that should be paid for a perfect forecast of the economy?
c) Develop an opportunity loss table for the investment problem, what decision would minimize the expected opportunity loss? What is the minimum EOL?
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